Wednesday, March 25th, 2009 at 7:19 AM
Who’s Buying?
Professor Piggington says that the comparison of buying to renting hasn’t been this reasonable in years:
Not sure exactly who the buyers are, but we can examine their down payments – it looks like those buying have some dough:
Down Payments of the 46 SD North County Coastal Detached Buyers, March 1-15
| Sales Price | Under 20% | 20% to 29% | 30% to 99% | All-cash |
| 0-$600K | ||||
| $600-900K | ||||
| $1M-plus | ||||
| Totals |
Eight sales were REOs, and seven were new homes, which leaves only 31 regular resellers. How did they do on same-house sales? Only 12 of 46 sellers (26%) had purchased since 2002, and only five of those sold for less than what they paid.
Like Rich said, each sub-market is having its own dynamics, but so far this month, 80% of the buyers from Carmel Valley to Carlsbad have been able to use at least a 20% down payment. The banks may be insisting on bigger down payments, but people are complying – if they find the right house, at the right price.
Posted on Wednesday, March 25th, 2009 at 7:19 AM in Thinking of Buying? | 37 Comments » | 
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Lots of investors back in the marrket up here in sacramento.I think these are pros and not gamblers we saw recently.Lots of properties cash flow.
arizonadude | March 25th, 2009 at 9:04 amLots of properties cash flow NOW
Lots of properties cash flow ON PAPER
Lots of people fear inflation and have no where else to stash cash.
If rates stay this low it’s because the economy sucks. If the economy sucks, finding a good long steady renter is easier in theory than in fact. Keeping rents where they are today is even harder.
If the economy improves then so does interest rates. Higher rates means downward pressure on house prices as risk-free hassle-free competitive returns on cash means investors need lower prices or higher-than-inflation rises in rent on houses to get similar returns.
As for professional investors…well, there have been alot of professional buy-and-hold investors buying houses over the last year. Can you point to any that wouldn’t have benefited by waiting to buy? How many of you think house prices are at bottom and will go up from here? If so, do you advice sellers to hold out for spring then?
In a deflationary spiral buy-and-hold dies a slow death. Look at the Japanese stock market over the last 18 years. Can you point to any time that buy and hold worked? Do you think that everyone who played in the Japanese stock market were amatures? If you think that deflation is unlikely, well apparently the FED is making unprecedented moves because they disagree.
The fact that so many current buyers are investors is really scary since at least those who buy what they can afford to live it have a chance to hold the property off the market for decades.
Today’s big-down-payments cash-flow-hopeful inflation-scared investors are tomorrow’s sellers. Much of this inventory being removed from the market isn’t permanent.
Average Joe | March 25th, 2009 at 11:43 amFear inflation is right–It is coming–Real Estate has ALWAYS been a hedge against that inflation. Buying the RIGHT property as an income property that cash flows (8 times gross in a good location???) is a very good way to hedge against that inflation. We are seening properties in areas of SD that are selling well below replacement cost. SD now, once again, has a net inflow of population, and stands to gain from several sectors such as wireless and Bit-Tech (Stem Cells???). Those that bought last year will end up just fine in the long run–you know the old saying–you can have the top and bottom 10%–I’ll take the 80% in the middle! Buy and hold!
Local Boy | March 25th, 2009 at 11:55 amI doubt many $600,000+ houses are being bought by investors.
lbids | March 25th, 2009 at 12:01 pmI think the big question is that 20% down on a $800k house is $160,000. How many people have that sitting around AND are looking to buy a house with it (as opposed to save for college/retirement)?
I have to think the supply of these kinds of buyers will run out at some point, or at least stay very low for a long, long time- far lower than the number of expensive houses that will be looking for buyers.
Rents went up along with home prices…
Genius | March 25th, 2009 at 12:21 pmBuy and hold worked when home loan rates went from 20% to 4%. Buy and hold will die a slow death as rates fight slowly from 4% back to 20%. That could take many many years if the FED has their way.
Beware the phrase “Realestate has ALWAYS….”
Stocks have ALWAYS outperformed over the long run….unless your long run is over the last 15 years when more people believed and DEPENDED on stocks outperfoming than ever before in history…ever.
Average Joe | March 25th, 2009 at 12:28 pmfrom George C.
The Mortgage Bankers Association said that applications for refinance loans rose more than 41 percent in the past week as homeowners took advantage of the lowest interest rates in history. The MBA said the average rate on a 30-year fixed-rate loan dropped to 4.63 percent from 4.89 percent in the previous week.
Jim the Realtor | March 25th, 2009 at 1:13 pmBuying property is not a hedge against inflation. Read ‘Average Joe’s first post. The only thing you hedge is that your rent increases with inflation. But your property value will actually FALL with rise-in-inflation/rise-in-interest-rates.
The FED created the biggest bubble in history with rate cuts of 2002, and now it is trying to outdo itself. There is no way to escape 80’s style inflation/interest rates at this point. What worked in the 80’s will in the coming years.
no bubble here | March 25th, 2009 at 1:44 pmGreat analysis average joe.You make some great points.I am seeing homes under 50k up here.Theses are the homes investors are going after.I would not want to live in one.Bunch of tweekers in the area.
arizonadude | March 25th, 2009 at 2:00 pm“There is no way to escape 80’s style inflation/interest rates at this point. What worked in the 80’s will in the coming years.”
California Real Estate worked pretty well in the 80s.
http://www.realestateabc.com/graphs/calmedian.htm
Kingside | March 25th, 2009 at 3:05 pmNo Bubble-
What about the cost to construct?
Local Boy | March 25th, 2009 at 3:41 pmAverage Joe-
Compare Apples to Apples–that is why I have NEVER owned stock.
Local Boy | March 25th, 2009 at 3:42 pmA timely item here since we just bought a new downtown condo (after a three year wait renting).
We paid all cash (from the sale of our place in the Bay Area, plus three years of interest). The developer – Bosa – put the last 20 units of Electra on “closeout” prices that we couldn’t refuse. The agent said they sold or have contracts for 9 of the units already – Nothing like LOW PRICES to get people off their butts.
Rent to own? When we moved here, I was getting about 5% on 600k, so it was paying for our rent, now the Fidelity money market is getting 1.01%, and ($500 a month) rent is 2600K. . .I am also concerned about the government having a “bank holiday” or not covering money market funds. . .so, better to own something real. At least we can live in the condo – if prices go down, we still have a place to live, mortgage free.
Mark in San Diego | March 25th, 2009 at 4:18 pmLocal Boy,
RE: “SD now, once again, has a net inflow of population, and stands to gain from several sectors such as wireless and Bit-Tech (Stem Cells???). ”
May I ask what your source is for the net inflow ? And does any of that inflow have a job ? (I ask that for real, not sarcastically). I have a lot of visibility into the telecom/biotech industries (and the job prospects in each) and it does not look very promising to me right now. In fact, I personally am very bearish on the local 100k+ jobs scene which supports the middle end coastal real estate.
You can take a drive around Sorrento Valley and count the # of “For Lease” signs you see for commercial property in office parks that formerly housed 100k+ jobs. When you are done (and it will take a long time to count all the signs) you could repeat this exercise in Northeast UTC near all the biotechs. You could also check out each local company that has announced, but not yet completely implemented, layoffs (e.g Amylin).
The growth in wireless telecom is pretty much over. Consolidation and services on top of the devices is the name of the game now. I can’t find a baby Qualcomm hatching in Sorrento Valley these days that will grow from 150 today to 15,000 in the next 10 years and spur 100s of startups that can get venture capital and bring large competitors to town in fancy new offices to get close to the talent pool (Qualcomm did all of those things over the last 10-15years).
There are a couple of promising biotechs in and around town (e.g VVUS or ARNA have a shot at stardom), but most of the more promising ones will get snapped up for their intellectual property by a big pharma company before they grow locally in my opinion. And there just isn’t a steady stream of brilliant entrepreneurs coming out the local schools to grow the industry much beyond what is out there today. So you need inflows of companies and jobs for economic (and housing) growth and that probably is not happening with the current tax regime.
So I don’t quite share your optimism based on my visibility into the local telecom/biotech industries. This year will probably be a net job loss for both of those industries even with some decent growth in stem cell research.
I hope this does not sound antagonistic. I am hoping you can show me where I might be wrong in my thinking. I was stunned at the # of empty office space I saw this weekend around Sorrento Valley. This is a recent phenomenon.
-FW
FuturesWatcher | March 25th, 2009 at 4:19 pmFutures-
Here is an article from the AP
http://ph.news.yahoo.com/ap/20090319/twl-metro-population-top25-1be00ca.html
I just read that the affordability index in SD is approaching an ALL TIME high, thus, the inflow of people–it is once again affordable for people to buy.
http://www3.signonsandiego.com/stories/2009/feb/20/1b20real02120-housing-affordability-index-gaining-/?business
Here is a recent article about stem cell dollars rolling into SD County http://www.cbs8.com/global/story.asp?s=10058320
Local Boy | March 25th, 2009 at 4:50 pmJim, did I miss the post on the Ohain $1.6 mil place?
Aztec | March 25th, 2009 at 4:55 pmThanks for the chart Kingside. The national chart looks more uniform.
http://www.realestateabc.com/graphs/natlmedian.htm
Hmm. If you bought a $100k home right now that returned net $5k rent for a 5% return and 2 years later banks started offering 10% interest, would your home value increase? Even if you had increased your rent 10% each year for the past 2 years, it would be $6050. And if you were to offer your house at $100k, it would return ~6%. So, how much upside is there to the price of your house considering a buyer can get 10% risk free? (I think the end calculation is a little more complicated, hopefully this is a good back of the envelope calculation)
no bubble here | March 25th, 2009 at 5:16 pmLocal Boy,
Those are fluff pieces. The UT article was written by some Public Relations company and forwarded to the reporter and then penned under their name. If you believe anything the AP writes regarding the economy you’re to dumb to realize that you’re being fooled.
Stop trying to argue a losing battle. The truth is home prices went up for 8-10 years. So far they’ve gone down for what 1-2 years? With more and more people being out of work do you really think home prices are going to shoot up again?
shadash | March 25th, 2009 at 5:17 pmShadash–You have your opinions (very strong I may ad) and I have mine. I believe that we are due for some serious inflation over the next decade and I have always found real estate in good areas to be an excellent hedge against that inflation–and I am positioning myself to continue to buy investment properties that cash flow accordingly–no need to name call here.
Local Boy | March 25th, 2009 at 5:28 pmNo bubble, I really don’t understand your hypothetical. First of all, I would not invest in Real estate at a current 5% cap. And I also disagree with you that Real Estate will decrease in value just because rates go up. Real Estate increased in value in the 70’s and 80’s as interest rates went up. Real Estate is going down in value now as rates are going down. So the two factors don’t really correlate in the real world.
And even if you are right in your hypothetical, I still would not care if I was getting the cash return on my investment I was hoping for. The taxi driver who buys his cab to earn income cares not if the value of his cab is going up or down.
Kingside | March 25th, 2009 at 5:59 pm“I just read that the affordability index in SD is approaching an ALL TIME high”
I think whoever wrote the article you refer to is at an all time high.
There are much better hedges against inflation than real estate. I think you are either trying to convince yourself otherwise or have some ulterior motive. However, I am in agreement that we’ll see inflation over the next decade. As always, best of luck in your investments.
Genius | March 25th, 2009 at 6:01 pmReal estate is only a hedge against wage inflation, and you might die of old age waiting for that ship to return.
The fact that there are people out there with cash that are jumping on perceived “deals” doesn’t surprise me. Anchoring (aka recency) bias is real; they’re comparing prices to 2006, not 1996.
The game *has* changed, though, and if they bought in the high end for anything other than a place to live they’ll be disappointed. OTOH, if they bought a place they really like, can afford, and plan to stay a while, then more power to them.
tj and the bear | March 25th, 2009 at 7:41 pmTake it for what it is worth, the fact is the the affordability index in San Diego is approaching an all time high–Final, End of Story, No Arguments, No Denials.
Local Boy | March 25th, 2009 at 7:44 pmLocal Boy,
Thanks for the articulate response. I am not personally seeing any job growth in high tech or bio-tech at the moment. So I am cautious as I wonder where the next wave of buyers will come from after the local pent-up renters get a place this year.
FuturesWatcher | March 25th, 2009 at 7:47 pmWhoever thinks affordability is at an all time high is smoking crack. Look back 100 years and you find the complete opposite is true. What is true is affordability is much better than it has recently been compared to the biggest housing bubble in 100 years. Sure, so what?
All around you, dumb people today are saying houses are cheap because they’re much lower than 2006 prices. No, house prices are simply much closer to reasonable, and with unemployment in double digits and average wages for everyone else stagnant all we can say is prices are no longer insane. But keep sharing your good stuff, God knows some of us need it to get over the pain.
sdbri | March 25th, 2009 at 8:10 pmthe fact is the the affordability index in San Diego is approaching an all time high
The trend is your friend. Affordability is climbing because house prices are dropping. Do you also buy stocks while they’re going down?
Guess what else is rising? Unemployment. Taxes. Average household size. Loan standards. Pretty soon interest rates, too. [Have you noted today's turmoil in the treasury market?]
Guess what is dropping? Homeowner’s equity. Homeownership rates. Real incomes. Credit scores. The number of people in the peak buying demographic.
I’ll wait until it stops raining knives before I jump in.
tj and the bear | March 25th, 2009 at 8:19 pmAccording to the HomeDex reports, affordability percentage is the percent of San Diego County households that can “afford” the median-priced SFA home in a particular zip code, assuming homeowners place 20 percent down and spend no more than a third of their income on housing at the prevailing monthly interest rates.
So under current circumstances, with median prices very low based on accelerated activity in the lower end of housing, interest rates at generational lows, and income figures not reflecting the increasing rate of unemployment, I can understand how affordability percentages are at record levels.
I am not sure that affordability means anything in terms of looking for a bottom. The higher it gets, though, the more oversold the market becomes. The more oversold the market becomes, The more intense the demand will be when the market finally does bottom.
Kingside | March 25th, 2009 at 9:50 pmthe more oversold the market becomes
Don’t you mean “less overbought”?
tj and the bear | March 25th, 2009 at 10:33 pmAnd I also disagree with you that Real Estate will decrease in value just because rates go up. Real Estate increased in value in the 70’s and 80’s as interest rates went up. Real Estate is going down in value now as rates are going down. So the two factors don’t really correlate in the real world.
——————–
A couple of things to keep in mind about the 70s and 80s:
1. Inflation was very high, including wage inflation.
2. Baby Boomers were in their peak buying years in the 70s, 80s, and 90s.
3. Baby Boomers (the ones buying in those decades) had seen wages and benefits get better for many decades, and were projecting that into the future. How many times did we hear about “stretching to buy today” because your wages were absolutely expected to go up over time? This maxim is no longer true, and younger buyers realize that jobs are not stable, defined-benefit pension plans are becoming a thing of the past, health insurance may or may not be paid for by their employers, and healthcare costs are way up! It’s more important now to keep fixed costs as low as possible, and housing is usually the #1 fixed cost for most families.
At least back then, politicians would feign disdain for illegal immigration and would pretend to acknowledge how low-wage immigrants and outsourcing jobs would put downward pressure on wages. Today, those voices are fewer and fainter than ever before (the corporations now completely own the politicians, IMHO). Today’s generations realize they are competing against third-world wage earners, and rising wages over one’s lifetime is not nearly as likely as it was for Boomers.
OTOH, the inflation argument could be valid, but it won’t be in the form of wage inflation. Rather, as wealth has been ever more concentrated at the top, this hoarded wealth will try to protect itself from the ravages of inflation (monetary and cost inflation, not wage inflation). We will certainly see more of this money coming into the real estate market, IMHO.
Really, there is no easy answer…otherwise we’d all be rich, rich, rich!
CA renter | March 26th, 2009 at 1:37 amOh, just wanted to point out that I focus on the Boomer generation because they were, overall, the wealthiest generation. Even if we grow our population via immigration from Latin America and other “developing” countries, this will not have the same effect that the much wealthier, more stable “Baby Boom” population buldge had.
CA renter | March 26th, 2009 at 1:41 amOne more point for rental properties. If we open our doors to wealthy immigrants, you can count on them buying portfolios of real estate that give them a good cash-on-cash return–just take a look at what happened look in Vancouver and Toronto.
Local Boy | March 26th, 2009 at 7:43 amTJ is right, real estate is a hedge versus wage inflation. We’ll have import inflation and domestic deflation. Or did you miss unemployment is over 10%?
Forigners drive the market and then panic out. They cannot overcome local wages. San Diego is *not* the best place for them to buy.
Do not forget that the affordability index assumes that wages were frozen for the year. Since that is not the case… expect it to be revised down.
There will be a time its smart to buy. But that is after the loan resets. Do recall that the nice areas are *just* starting their loan resets.
Got Popcorn?
Neil | March 26th, 2009 at 8:05 amNeil
Rentals in nice areas usually don’t really work out on paper anyhow. The areas that we are buying have already been beaten down to mid 1990’s levels. We just closed one in good condition, in a decent neighborhood for $140K-it had sold in the frenzy for over $500–We have several applications to rent it for $1800. I know that we are not at the bottom yet, but it is difficult to time the bottom–the only way that you know that the bottom has hit is after the fact–once prices have gone up. I plan to hold these rental properties for the next decade-if they increase enough before that, then we may sell earlier. With rates low, prices down and rents up, I feel there is plenty of opportunity to buy. If it is a primary residence–it is MUCH more important to get the RIGHT house that you can afford.
Local Boy | March 26th, 2009 at 8:23 amI’m calling baloney if I am reading Local Boy’s numbers correctly.
$140k purchase price and $1,800 a month in rent? Your numbers are either wrong or there is something you are not telling us. In any event, that is definitely not ‘common’.
I heard about the ‘net’ inflow of people into Southern California. Are these numbers quoted for gross movements? I’m guessing there was a net inflow because no one could sell their house to move the heck away from this state.
Joe Schmoe | March 26th, 2009 at 3:20 pmThese deals ARE out there–branch off a bit from the coastal areas and you’ll find them. Here is one we tried to buy a week ago–should have gone a little higher–They ended up getting 16 offers, but it still would have been a nice buy at $160K–Easily an $1800 rental. Just needed interior paint, carpet, appliances and new decking material–someone took the Trex Decking.
MLS #: 090015074
Local Boy | March 26th, 2009 at 3:38 pmLocal boy, so there IS something you didn’t tell us. What is the condo fee for that house? And why is it an “easily” $1800 for such an apartment-size property?
CA renter, I agree with your point about there will be cost inflation but no wage inflation. So I think we will see more rental properties down the road as the wealth being poured into the local real estate to protect against price inflation. So people who rely on paper cashflow now should be extremely cautious: the competition is heating up. And as in any business, only those who can really manage their rental property well can survive in such kind of competitive market. Of course, for people who are buying it for primary residence, if you can afford it, go ahead. You, unlike rental property owners, are going to have the best tenants you’d find in the whole world: your family.
temecula_guy | March 26th, 2009 at 4:44 pmTemucu–The property I was referring to originally, as well as the MLS example that I posted are both SFR’s with no HOA–Market rents in SD county are strong–I was wrong however, the actual rent is only $1795, not $1800-I rounded up–sorry. Our cheapest rental in that market area is $1495 for a 3/1, 1050sf duplex with no yard, again multiple applications on both sides.
Local Boy | March 26th, 2009 at 5:08 pm